A step toward a more efficient dispute resolution mechanism in Brazilian public contracts

February 2017 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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On 25 November 2016 the Brazilian president Michel Temer signed Provisional Measure 752/2016, which, among other objectives, seeks to remedy a series of impasses related to concession contracts in infrastructure sectors.

These concessions were made due to the Investment Partnerships Program (PPI), a project created by the Brazilian government which seeks to expand and strengthen the relationship between the state and private initiatives. Its main objective is to generate jobs and growth for the country, through new investments in infrastructure and privatisation projects, specifically in the rail, port and highway sectors.

The document has 26 articles which state the general guidelines for the extension and re-agreement of concessions, allowing the contracted party to extend the agreement term, granted that they make additional investments, or to withdraw from it, if their execution proves to be economically unfeasible. According to the minister of planning, Dyogo Oliveira, the measure adopted by the government could generate $4.5bn in the coming years.

Provisional Measure 752/2016 also has the objective of increasing legal security in public contracts, by defining arbitration as the dispute resolution mechanism regarding conflicts between the public administration and concessionaires.

In this sense, the arbitration institute can be understood as an extrajudicial mechanism in which the parties decide to submit disputes to a third party to provide a definitive and enforceable decision, since the arbitral award is a judicial enforceable title, according to art. 515, VII, of the Brazilian Code of Civil Procedure. That third person assumes, as soon as they are chosen, duties of impartiality and independence.

Indeed, arbitration has various advantages compared to litigation. For example, the possibility of the parties choosing: (i) the arbitrator – be it a lawyer or expert, depending on the nature of the case; (ii) the law and the location applicable to the procedure; and, finally, (iii) the proceedings can be settled confidentially.

In other words, the negative effects of submitting a dispute to Brazilian state courts can be avoided, since the direct choice of the judge regarding his expertise, besides the law applicable to the procedure, make it possible for precise and technical decisions to be rendered in record time compared to the Brazilian Judicial system.

In order to make arbitration in this sector fully effective, article 15 of the Provisional Measure makes the re-engagement of partnership contracts conditional upon the conclusion of contract addendums, which include arbitration clauses among the others terms of contract.

In this regard, it is worth highlighting some specificities of Provisional Measure 752/2016. In Article 25, for instance, it expressly states that “disputes arising from the partnership contracts in the sectors covered by this Provisional Measure may be submitted to arbitration or other alternative dispute resolution mechanisms, after a final decision by the competent authority regarding the available property rights”.

When analysing this provision, it can be said that it violates the principle of free access to the judiciary, provided in article 5, XXXV of the federal Brazilian constitution. Indeed, a demand can be appreciated by state courts or by the arbitrators, independently, if an administrative award was already rendered on that matter.

Nevertheless, the text is innovative, stating, explicitly, which sort of conflicts may be solved by arbitration. It is worth mentioning that only patrimonial rights available would be arbitrable, as determined by Article 1 of the Brazilian Arbitration Act. Following this understanding, Article 25, section 4 of Provisional Measure 752/2016 clarifies that: (i) issues related to the reestablishment of the economic-financial balance of the contracts; (ii) calculation of indemnities resulting from the termination or transfer of the concession agreement; and (iii) breach of contractual obligations by either party, would be arbitrable for the purposes of that law.

Additionally, paragraph section 20 provides a clear solution for problems related to public administration budgetary limitations, as it expressly states that arbitration costs will be paid in advance by the private partner, which will only be reimbursed after the final award is rendered by the arbitral tribunal. That provision repeats the text of article 11 of the Minas Gerais Arbitration Act, which deals with arbitration in the public sector, demonstrating, in this sense, that this understanding will soon be adopted nationally.

Finally, section 30 of that article informs that the arbitration will be conducted in Brazil and in Portuguese, not including, in this sense, any restriction regarding the law applicable to the merits of the dispute. This provision is important, as it does not prohibit that international rules may be used in arbitration involving the Brazilian public administration, following, in this regard, the understanding of preposition 11 of the Brazilian Meeting regarding Prevention and Settlement of Disputes which expressly states that: “It is allowed to adopt international rules of commerce and / or customs applicable to the respective technical areas in arbitrations involving the public administration”.

Although private airport operators and highway concessionaires criticised Provisional Measure 752/2016 (having expected greater benefits from the government, due to the severe economic crisis that Brazil is experiencing), an important step was taken toward a more efficient dispute resolution mechanism in Brazilian public contracts.

Undeniably, by defining arbitration as the dispute resolution mechanism to be used in these types of agreements, Provisional Measure 752/2016 has guaranteed greater juridical security for the sector, allowing quicker and better decisions to be rendered. Indeed, arbitration proceedings are undeniably a trustworthy, transparent and efficient dispute resolution mechanism that is able to provide national and foreign investors with quick and well-founded decisions, thereby contributing to trade and investment.

Aécio Filipe Coelho Fraga de Oliveira works in the arbitration department and Marcello Vieira de Mello is a partner at GVM Advogados. Mr de Oliveira can be contacted on +55 31 999576677 or by email: aoliveira@gvmadvogados.com.br. Mr de Mello can be contacted on +5531 32642400 or by email: mmello@gvmadvogados.com.br.

Aécio Filipe Coelho Fraga de Oliveira and Marcello Vieira de Mello

GVM Advogados